CHRONICLE OF A WALL STREET FAILURE for
YOU WHO STUDY STOCKS, THE ECONOMY and ARE WARY OF
ANOTHER DEPRESSION ARRIVING WITHOUT SIGNS. THERE ARE
ALWAYS SIGNS for the WATCHFUL...READ "Another bank
with its chin in the dustLehman
BrothersTheir bank losses shake
financial markets WORLDWIDE"

By
Andre Damon
12 June 2008 3mos before Wall Street crash

Lehman Brothers
announced a projected $2.8 billion second-quarter
loss on Monday, its first since going public in
1994. The Wall Street firm concurrently announced
its intentions to raise $6 billion of capital and
reduce its reliance on borrowed funds.

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Both Moody’s and
Fitch Ratings downgraded Lehman’s creditworthiness
in response to the announcements. The investment
bank’s stock has fallen sharply since last Friday.

The losses at
Lehman’s were coupled with Monday’s announcement by
Standard & Poor’s that it had cut the AAA credit
ratings of bond insurers MBIA and Ambac Financial
Group, effectively lowering the credit ratings of
some $100 billion in debt. Analysts, meanwhile,
announced that they expect Washington Mutual, the
United States’ largest savings and loan association,
to suffer mortgage losses of some $21 billion over
the next three years. The firm’s stock has tumbled
by 34 percent over the past two weeks.

Erin Callan,
Lehman Brothers’ chief financial officer, played
down the current risks to the bank’s balance sheet,
but said that the capital-raising was engineered to
“end the chatter about Lehman Brothers.” The
“chatter” is persistent speculation that the firm is
teetering on the brink of insolvency.

At the time of
the March 14 bailout of Bear Stearns by the Federal
Reserve Board, it was widely believed in US
financial markets that Lehman Brothers would soon
follow Bear Stearns into bankruptcy. The Fed’s
decision to extend direct loans to investment
banks—something unprecedented since the Depression
of the
1930s—was in part prompted by fears that a Lehman
failure would trigger a wave of Wall Street
collapses and a general financial meltdown.

Lehman, the
smallest and most vulnerable of the major US
investment banks, was among the major beneficiaries
of the new Fed policy, and used the loans to
temporarily stabilize its positions.

Lehman Brothers
is attempting to trim its leverage—the ratio of its
assets to borrowings—from 32 to one to 25 to one.
The firm had previously been able to provide high
returns to its shareholders by using the easy
credit conditions that then prevailed to make very
large investments with borrowed money.

This approach
has become unviable as credit has dried up, leaving
Lehman with what appears to be a crisis of both
short-term and long-term profitability. Within
financial circles there is talk that a further
deterioration of credit conditions could result in
more bank failures along the line of Bear Stearns,
and Lehman Brothers is generally considered to be
the most endangered.

Of the big Wall
Street investment banks, Lehman remains the most
closely tied to mortgage-backed securities and
speculation in leveraged corporate buy-outs—two
markets that have imploded since last summer. The
firm’s announcement served as a rude awakening to
markets that the banking crisis is by no means over,
and
that more Federal Reserve bailouts may be in the
offing.

The Federal
Reserve has made clear its intention to prevent the
failure of major Wall Street firms, ultimately with
public funds. There are those within the financial
establishment who see large-scale bailouts as
detrimental to financial stability in the long run.
A criticism along these lines was put forward June 5
by Jeffrey Lacker,
president of the Federal Reserve Bank of Richmond,
who observed: “The danger is that the effect of
recent credit extension on the incentives of
financial market participants might induce greater
risk-taking, which in turn could give rise to more
frequent crises, in which case it might be difficult
to resist further
expanding the scope of central bank lending.”

Lacker’s public
dissent, coming on the same day as a major speech by
Fed Chairman Ben Bernanke, is highly unusual, and
underscores the internal tensions and divisions
fueled by the ongoing financial crisis. The cheap
and abundant credit injected into the financial
system by the Fed’s policies has contributed to an
inflationary upsurge
in the United States and internationally and
accelerated the fall of the dollar relative to the
euro, the yen and other major currencies. This
depreciation has in turn fueled the eruption of oil
prices and rampant speculation in commodities
prices.

In a speech
delivered June 3, Bernanke said that the Federal
Reserve would take measures to fight inflation and
prop up the dollar. This led to a temporary
strengthening of the US currency, but by Friday
markets panicked in response to the release of
higher-than-expected US unemployment figures.
Investors dumped dollars and poured into commodities
futures, driving the price of oil up $10 in a single
day.

Bernanke again
attempted to take an anti-inflationary stand on
Monday evening, telling a conference in
Massachusetts that the Fed will “strongly resist an
erosion of longer-term inflation expectations, as an
unanchoring of those expectations would be
destabilizing for growth as well as for inflation.”

Asian markets
tumbled at the announcement on Tuesday, with China’s
stock index falling 8 percent. China’s currency is
unofficially pegged to the dollar, and is especially
responsive to US policy. The country is also
experiencing significantly higher inflation, which
has reached an annual rate of 8 percent and has
resulted
in negative real interest rates. The European
Central Bank (ECB) showed no signs that it would
cooperate with the Fed’s new exchange rate policy.
Last
week, ECB President Jean-Claude Trichet indicated
that the central bank would raise its interest
rate by 0.25 percent, undercutting a short-lived
rally of the US dollar on currency markets.

The conflict
between the Federal Reserve and the European Central
Bank is in many ways unprecedented. As Wolfgang
Münchau of the Financial Times noted, “In the past,
European central bankers tended to follow the US
Federal Reserve, often with delay, never perfectly,
but generally in the same direction.”

A major and
common aim of both the Fed and the ECB is to soften
the labor market through job-cutting, in order to
prevent the development of a wages movement by
workers seeking to offset soaring fuel and food
costs. The US unemployment rate has increased for
five straight months, culminating in last week’s
announcement that the official jobless rate jumped
from 5 to 5.5 percent during the month of May.

Long-term
layoffs have increased significantly over recent
months, spearheaded by job cut announcements
at major airlines, which have eliminated 22,000 jobs
this year alone. The trend is by all indications
accelerating, as indicated by recent figures showing
that planned layoffs increased by 15 percent in May
over April.
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* * NOW IS THE TIME. ORCHARD/
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